A recent decision by the U.S. Circuit Court of Appeals addressed the constitutionality of the Consumer Financial Protection Bureau (CFPB) and permissible activities by entities under the Real Estate Settlement Procedures Act (RESPA). 

The parties 

PHH Corporation 

PHH Corporation (PHH) is a large United States home mortgage lender that refers mortgage insurance business to mortgage insurance companies. Some mortgage insurance companies acquire reinsurance; PHH created Atrium, a captive reinsurance company. A captive reinsurance company is primarily created to exclusively insure or reinsure the risks of a group to which it belongs. Generally, the reinsurance company does not issue policies but rather reinsures the risks by the insurance company issuing the policies. 

PHH relied on a 1997 HUD letter that permitted the creation of Atrium and the associated referral fees from Atrium to PHH under RESPA Section 8(c)(2). Section 8(c)(2) discusses the payment to any person of a bona fide salary or compensation for goods or facilities furnished or services actually performed; provides some exceptions to allow mortgage, title and other settlement service providers to work together without violating RESPA; and is the legal foundation for captive reinsurance as well as most marketing and advertising activities by a variety of industries. 

CFPB 

CFPB is a federal agency created due to the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as Dodd-Frank. CFPB wields substantial power to enforce various federal consumer protection laws. As an independent bureau within the Federal Reserve System, CFPB works to promote fairness and transparency with regard to mortgages, credit cards, and other consumer financial products and services.

CFPB primarily regulates banks, lenders, mortgage brokers, mortgage servicers, financial advisors, appraisers and credit counselors. The bureau regulates the extension of credit, mortgage loans, appraisals, real estate closing and escrow services, and other related financial activities.

CFPB has the authority to: 

• Examine. 
• Issue new rules. 
• File enforcement actions against: 
  • Banks and credit unions with assets of over $10 billion and all mortgage-related businesses, which include lenders, servicers, mortgage brokers and foreclosure scam operators.
  • Payday lenders and student lenders as well as other large, nonbank financial companies such as debt collectors and consumer reporting agencies.

The National Association of REALTORS^® secured an exemption under CFPB for real estate professionals performing traditional real estate activities, except to the extent they are governed by existing laws such as the RESPA and the Truth in Lending Act (TILA), which are under CFPB’s purview. 

The action

The procedural process of how CFPB enforcement actions get to the federal court is very specific, and this article does not go into the procedural process of these types of actions. 

CFPB enforcement action against PHH

CFPB claimed the referral payments by Atrium were unlawful under RESPA and in violation of Section 8(a), which prohibits giving or accepting a thing of value for a referral of a settlement service provider. CFPB filed an administrative lawsuit before an administrative law judge (ALJ). In the holding, the ALJ recognized the validity of Section 8(c)(2) as exemption and was guided by the 1997 HUD letter PHH relied on to create Atrium. 

The ALJ found: 

• The referral fees paid between Atrium and PHH are kickbacks in violation of Section 8(a).
• Disgorgement of ill-gotten profits by PHH of $6 million ($109 million - $103 million = $6 million). 
• CFPB is not subject to a three-year statute of limitations (SOL). 

Both PHH and CFPB appealed the ALJ decision to the CFPB director Richard Cordray.

Opinion by CFPB Director Richard Cordray 

The 2015 opinion claimed:

• CFPB was not bound by:
  • The ALJ rulings.
  • The 1997 HUD letter. 
  • Established the three-year SOL. The Cordray opinion actually extended the SOL beyond three years. Essentially, Cordray held each time a mortgage payment is made, the three years begins. Thus, the opinion created a continuous violation. 
  • There is no protection under Section 8(c)(2) for referrals.
• Disgorgement of ill-gotten gains by PHH of $109 million; every cent is refundable.

One of the biggest concerns about the Cordray opinion is it obliterates the Section 8(c)(2) safe harbor; meaning any referral fee made in a transaction previously protected under RESPA is gone. The Cordray opinion went directly against HUD guidance that existed for over 35 years as well as federal court decisions relating to RESPA referrals and the plain language of Section 8(c)(2). 

PHH appealed to the US Circuit Court of Appeals. 

U.S. Circuit Court of Appeals for District of Columbia

On appeal, PHH contends, the Cordray opinion: 

• Inaccurately interprets Section 8(2)(c). 
• Retroactive application of its interpretation is a violation of due process.
• Ignores the three-year SOL timing. 
• Does not relate harm to disgorgement. 
• Claims CFPB is unconstitutionally structured because Article II of the United States Constitution says executive power is vested in the president. However, Congress created a single director of CFPB and narrowly limited the removal for cause. 

On October 11, 2016, a three-judge panel issued a ruling overturning the monetary penalty imposed by CFPB against PHH. In its decision, the panel declared CFPB was wrong on the following:

• Interpretation of RESPA: Section 8(c)(2) exempts these types of referrals.
• Penalty imposed: Disgorgement is the difference between amount paid and reasonable market value. Any excess is refundable. 
• Claiming no SOL applied: RESPA has a three-year SOL and cannot be determined by the director. The court did not resolve how the three years was calculated and remanded the three-year SOL. 
• Cannot retroactively apply a new interpretation. 
• CFPB was unconstitutionally structured and the CFPB director was more powerful than the president on consumer financial issues. Two of the three judges agreed on this issue.

What does the circuit court decision mean? 

CFPB will follow the court’s decision until further determination. While this is deemed a victory for the real estate industry, each firm should still rely on its attorney if the firm is involved in market service agreements. 

Presuming CFPB appeals either on the constitutional issue, REPSA issue or both, CFPB has a number of different avenues — one of which includes appealing directly to the U.S. Supreme Court. It is unlikely this issue will be resolved in the next year. Furthermore, it is unclear under the Trump administration if CFPB will be restructured or even continue to exist. 

We will keep you informed as things progress.

Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.